Here's the CSFB report
Demand Still Strong; IPR Debate Continues
Maintain Outperform, $52 price target: We continue to expect WCDMA
adoption to accelerate and that QCOM will achieve revenue and EPS growth
ahead of the market. Given the imminent expiration of QCOM’s licensing
agreement with Nokia, we are lowering our FY07 EPS est. (incl. options) to
$1.63 from $1.67 to reflect no WCDMA licensing revs from Nokia in FQ4:07
(Sep.). However, given our view that a decision will ultimately be reached,
we are raising our FY08 EPS est. (incl. options) to $2.09 from $2.05 (i.e.
FQ4 royalty revs will be deferred to FY08). Our FY07E/FY08E EPS est. (excl.
options) are $1.83/$2.28 ($1.87/$2.24 if an agreement is reached by Sep).
Near-term resolution with Nokia unlikely: Last week’s events support our
view that Nokia and QCOM remain at polar opposite positions and are
unlikely to reach a settlement near-term: (1) QCOM filed additional
GSM/EDGE patent infringement cases against Nokia (2) QCOM released a
document from Nokia’s Nov. 2004 GSM patent infringement case against
Vitelcom, highlighting the differences between Nokia’s arguments as a
licensor in that case and as a licensee with QCOM, (3) Nokia announced
that it paid QCOM $20M for UMTS/WCDMA licenses covering C2Q:07,
which implies a royalty rate of <1%, (4) QCOM filed an arbitration demand to
determine that Nokia’s continued use of QCOM’s patents after 4/9
constitutes an election to extend the current license agreement and its terms.
Near-term demand trends remain strong: In addition to improving 3G
demand trends in Europe and Japan, we would highlight strong CDMA
demand as a potential driver of royalty upside in FQ3, given a 32% seq. unit
increase in shipments in Korea in the Mar. quarter vs. our est. of 17%.
Valuation: At 23x/18x 2007E/2008E EPS (27x/20x adj. for net cash and
options) we continue to view the risk/reward as attractive; however we would
note that newsflow related to Nokia negotiations could result in additional
share price volatility. Our DCF-based $52 price target embeds 11% LT
growth and 50% EBITDA margins.
09 April 2007
QUALCOMM Inc. (QCOM) 2
Investment Summary
We continue to expect WCDMA adoption to accelerate and that QUALCOMM will achieve revenue and EPS growth ahead of the market. Given the imminent expiration of QUALCOMM’s licensing agreement with Nokia, we are lowering our FY07 EPS (including options) estimate to $1.63 from $1.67 to reflect the impact of not recognizing Nokia licensing fees in FQ4:07 (Sep.). However, given our belief that a decision will ultimately be reached, we are raising our FY08 EPS (including options) estimate to $2.09 from $2.05 (i.e. FQ4 royalty revenues will be deferred to FY08). Our FY07E/FY08E EPS estimates (excluding options) are $1.83/$2.28, although our normalized EPS estimates (assuming an agreement is reached by September) remain unchanged at $1.87/$2.24.
While QCOM's guidance for the September quarter included an EPS impact from not recognizing royalty revenues from Nokia of $0.04-$0.06, we would note that this includes CDMA and WCDMA royalties. Given our expectation for Nokia to work with ODM partners (who have separate license agreements with QCOM) for CDMA in the future, our $0.04 estimate is based on WCDMA royalties only. While this estimate has the potential to be offset further by Nokia's announced $20M payment, we would note that QCOM's response to the payment (and the related accounting impact) remains unclear. Our estimates for the potential impact of Nokia not paying WCDMA and/or CDMA royalties in FQ4:07 and
FY08 is illustrated below in Exhibit 1:
Exhibit 1: Impact of Nokia not Paying Royalties in FQ4:07 and FY08
US$ in millions, unless otherwise stated
FQ4:07 FY08
WCDMA
QTL revenues $105.6 $504.0
EPS $0.04 $0.19
CDMA
QTL revenues $14.0 $34.3
EPS $0.01 $0.01
CDMA/WCDMA Combined
QTL revenues $119.6 $538.4
EPS $0.05 $0.21
WCDMA adjusted for announced Nokia payments
QTL revenues $85.6 $408.6
EPS $0.03 $0.16
The series of announcements last week from both QUALCOMM and Nokia has reinforced our belief that a settlement is not imminent as the companies remain at polar opposite positions. We would note that even the historical royalty rate appears to be a contentious topic given the directly contradictory statements by the two parties:
Nokia: “Nokia has until 2007 paid less than 3 per cent cumulative license fees under all of its patent license agreements involving WCDMA products.”
QUALCOMM: “Nokia's claim that it has been paying cumulative royalties of no more than 3% on WCDMA products sold through 2007 is intentionally deceptive and misleading. Nokia has been paying a royalty on WCDMA handsets in excess of 3% to QUALCOMM alone.”
However, our view on the likely outcome remains unchanged and we continue to believe that a final settlement of IPR issues could include the following (for a more detailed discussion of IPR issues, please refer to our previous note 3G Economics Update; IPR Debate Heating Up, dated March 26, 2007):
Mutual self interest will prevail in the end: Despite the two companies currently
being at polar opposite positions, we do believe that mutual self-interest is likely to prevail and an agreement will be eventually be reached outside of drawn out arbitration or court proceedings. The success of WCDMA is a common interest for both companies, as it is crucial to the financial performance of the entire sector in the coming years.
QUALCOMM WCDMA royalty rate unlikely to be reduced: Despite Nokia’s hope
that QUALCOMM will be forced to lower its royalty rate for WCDMA, we believe that this is ultimately unlikely. In addition to the commercial precedent established by QUALCOMM’s 60+ other WCDMA terminal licensing agreements and the strength of QUALCOMM’s patent portfolio, QUALCOMM will be motivated to avoid an agreement that would trigger any “most favored nation” clauses in other agreements and ultimately lower the royalty rate paid by other vendors. However, given that QUALCOMM has not historically pursued a GSM licensing program, we believe it is not likely to obtain a meaningful royalty-bearing license related to GSM/GPRS/EDGE handsets, particularly to the extent its WCDMA royalty rate structure does not change.
Industry royalty rate to rise, but not to the level that is feared: We believe it is
likely that smaller vendors with limited/no IPR to trade will need to pay royalties to several key WCDMA IPR holders beyond QUALCOMM, including Ericsson, Nokia and potentially Motorola. However, we believe it is unlikely that royalty rates will approach the 25-30% level that is feared or that we will see a return to historical GSM royalty rates. We would expect the cumulative rate for smaller vendors to be well above 5% and would view 10-15% as a more likely long-term range. |
